Behind the moves - The warehouse & logistics financial markets

Growing worries over recession pounded equity markets both sides of the Atlantic since our last report on December 21, 2007, leaving the DJ Industrials down 1,351 points at 12,099 and the FTSE 100 off by 533 points at 5,901. Data on US factory activity, retail sales and the housing market all turned negative, exacerbated by the bizarre spectacle of Middle and Far Eastern investors bailing out two of Wall Street's top investment banks, hit by the sub-prime mortgage implosion. News of a $140bn fiscal boost to the US economy and expected cuts in US lending rates failed to impress investors, as they ran for cover in safe haven investments.

Investors, it seems, have lost some of the respect for the Fed's ability to smooth the markets, which in any event was always more dependent on its reputation than its actual resources. The Fed has lost credibility for failing to prick the stock bubble of the 1990s and the recent housing bubble, the latter of its own creation following irresponsibly low interest rates of 1%. There are many other reasons why the Fed has lost respect, like rewarding those very institutions that helped create the present credit crisis, fired by uncontrollable greed. If the Fed fails to clean up its act, the task of restoring normality in financial markets will be even harder. All the current financial woes were foreseeable, but as history repeatedly shows, when greed bestrides the saddle history's valuable lessons are ignored.

In Britain, the Bank of England, for once, stood firm against the shrill squawks from retailers, in particular, calling for immediate rate cuts in the aftermath of what they claim was a poor Christmas season. Markets confidently expect a rate cut in February but that would be a mistake as the greater threat comes from rising inflation, given a boost by recent, hefty hikes in energy bills.

European and Far Eastern markets also succumbed to the depression, leaving the Eurofirst 300 at its lowest level since August 2006, and Australian and Hong Kong stocks also fell sharply over the last week.

The turmoil over the last month left our own selection of stocks badly battered, with only two stocks rising and 28 falling, many showing double digit percentage falls. Of the risers, Metalrax gained 60%, a reaction, perhaps, to being oversold following a profit warning. Business Post, also looking oversold, rose 9% following an up beat interim management statement which showed group revenues for the last quarter of 2007 up 13% over the same period of 2006. Its UK mail business continues to achieve strong growth, with sales up 60% on 2006's final quarter. The company now handles 10% of all mail collected in the UK. Overall, the board expects good progress for the whole year.

Among the 3PL service providers, percentage declines were typically in double digits, led by Group Norbert Dentressangle, which now includes Christian Salvesen, down by nearly 20%. Next came Geodis, down 16%, DSV, off 15%, and TNT, 12%. The UK's biggest, British-owned 3PL, Wincanton, eased back 10%.

Many of the IT specialists supporting the 3PLs showed equally heavy losses, with Motorola leading the way down with a near 20% fall.

The forklift pitch fared worse. Cargotec, makers of the Kalmar brand, slumped 25%, Jungheinrich by 20% and Manitou and Caterpillar by over 15% and 10% respectively. Nacco Industries, makers of the Hyster and Yale brands, slumped 15% as it comes to grips with restructuring its forklift division. As a conglomerate, however, it expects 2007's results to be in line with those of 2006.

Sophisticated hardware kit suppliers to the automated warehouse industry were savaged amid signs that such investments were being shelved until the outlook for the global economy clears. Britain's largest supplier in this field, FKI, fell over 10%, close to its year's low, while Swiss-based Swisslog Holdings slumped 20%, likewise testing its year's low. Sub systems supplier, Interroll, which had enjoyed an unjustified run up, in this column's view, slumped nearly 20%

Bill Redmond

Companies Set to ride out economic storm

The UK economy is set for a rocky year ahead, but two thirds of fork lift trucks companies look surprisingly well placed to benefit, according to leading market analysts Plimsoll Publishing.

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The market chasers
"These 71 companies spent 2007 gearing up for growth - to such an extent that some of them are completely reliant on outside finance. Despite the prospect of even tighter credit, they look surprisingly confident to continue with their aggressive expansion plans. With their expected growth rates likely to be in the 20% to 24% range, they could cause chaos in the market as their undercutting pricing policies cripple the competition. Capturing sales from other players is a key part of their strategy.

"The biggest threat to these companies is any interruption of cash flow, which could be fatal. They need to hope that the financiers and the banks don't become any more nervous as the year develops."

The predators
"This group has most to gain in 2008, and the companies in question are capable of funding their investments with their own cash, rather than looking for outside finance. They have enjoyed average profit margins of 5.2% in the last two years, and the economy will play into their hands in 2008, as competitors go under and cheap acquisitions appear on the market.

"The biggest danger in this sector is missing opportunities because of a lack of clear strategy."
The prey

"These companies are badly exposed because 50 of them are losing money, they are in debt and their ability to respond is slow. If they act quickly, cut costs and bring their bad news out now, they may still turn things around.

"The biggest threat they face is leaving it too late in 2008 to act."

The fence-sitters
"These companies have been slowing down their capital expenditure, controlling costs and sticking to profitable areas of their business. They have been staggeringly profitable, making margins of more than 5% year on year, often in niche markets.

"The firms in question may appear to be in the lowest risk category as they ride out the storm. But doing nothing is perhaps more dangerous than you think. All it takes is for a more aggressive player to target their sector of the market and their position could be jeopardised."

Finally, with apologies to Ian Dury, Plimsoll offers some Reasons To Be Cheerful in 2008. These include:
- Going to your customers and reasonably arguing to pass on costs
- Company failures creating breathing space in the market
- Using the downturn as an excuse to make changes you have been dying to make for ages

Plimsoll Publishing
David Pattison
www.plimsoll.co.uk

Latest West Trax Study data confirms SAP UK MD's concerns

Logistics Service Providers are failing to exploit the full potential of the software they are paying for, a 2007 report from West Trax reveals.

The transport industry is among 13 different sectors named in the report, which shows that companies are using less than half of the standard SAP code they pay for, wasting millions of euros each year as a result, due to it sitting there doing nothing.

In its report, West Trax found that users were typically failing to fully exploit the potential of the standard SAP functionality that was available in their systems. In business areas where some SAP standard transactions had been used a very high proportion of the available standard functionality remained unused.

Companies use SAP(R) solutions to solve the core dilemma of transportation - how to meet the unique delivery requirements of customers while still achieving profitability. The SAP(R) Transportation Management application together with Supply Chain Management application helps companies increase visibility and control of shipments globally while reducing the costs associated with transportation management by making the process more flexible and dynamic. It enables companies to sense and respond quickly and profitably to the fast pace of change in today's competitive transportation environment.

Even in most of the Best Practice systems in the study, more than 50% of the SAP standard transactions that were relevant to the users' businesses and available in their systems were not used. Users pay licence and maintenance fees for this software yet failed to exploit the potential to convert these costs into business value. Optimising a system based on current usage can reduce workload and costs significantly.

On November 26th at the SAP UK & Ireland User Group Conference in Birmingham SAP's UK MD Steve Rogers challenged the delegates present to use their SAP assets more effectively. "I find it frustrating that the majority of you only seem to be using a modest slice of the software you have acquired," Rogers said.

West Trax recently repeated last year's groundbreaking SAP Cost / Benefit Study. Data was analysed from 269 benchmarks in 13 different industry sectors. The intent was to objectively examine the actual usage of SAP systems using the KPI Scan(R) methodology and to compare the results with those from the previous year.

Mr. Rogers also urged users to upgrade their systems. This message was repeated by Martin Reidel, head of SAP's global upgrade office who commented that UK organisations were amongst the slowest to adopt the latest version of SAP's core ERP product. The West Trax study highlights one of the possible reasons for users' reluctance to upgrade - the high levels of customisation in current systems.

In the systems analysed, between 20 and 40% of the transactions used were customised, incurring significant development and support costs in addition to SAP's licence and maintenance fees. In every sector the Measured Best Practice (MBP) values demonstrate that it is possible to operate using less custom code, especially as the Best Practice systems may themselves contain considerable unrealised optimisation potential.

Ecommerce survey reveals another happy eChristmas

An early poll done by retail specialist, Actinic, into Christmas trading results has found continued growth in shopping online. Respondents reported a 27% rise in the number of customers buying online at Christmas compared to the same period in 2006. They also reported an even greater increase in internet revenues at 46% - indicating that not only are more people shopping online, but they are spending more as well.

The poll also found ecommerce making a greater proportional contribution to the bottom line compared with other channels. Companies trading both online and offline, reported that on average, just over 50% of sales in November and December were made online, compared with only 30% in 2006.

According to Actinic CEO Chris Barling, the results show that growth in online spending remains remarkably buoyant. "Considering the effects of the US credit crunch, the Northern Rock crisis and the general overall decline in confidence, 46% is remarkable growth and continues the rise and rise of online retailing," he says.

In all, over half of retailers who responded were very confident that online sales would continue to increase in 2008. Less than a quarter expressed the same level of confidence that conventional retail sales would grow.

Jason Beer of Quality Silver is one retailer who is very certain of continuing acceleration into 2008. "The number of people purchasing online is growing faster than the number of internet retailers," he believes. He also cites increased consumer confidence in online security as a reason for the sustained growth.

Behind the moves - The warehouse & logistics financial markets

New York and London regained some of their poise since our last report on November 23, with the DJ Industrials rising 470 to 13,450 and the FTSE 100 up 172 to 6,434, bolstered, it seems, by reports of more foreign investment shoring up American bank balance sheets. Yet the underlying mood remains cautious over the credit crunch outlook, and UK consumer confidence is at its weakest for more than 10 years.

The caution is well justified as the American sub prime mortgage debacle has far more damage to do, and could be followed by a similar scenario from the credit card industry, where debt almost matches the suspect, securitised debt on sub prime mortgage loans. Already, as though mirroring the "Grapes of Wrath," depicted in Steinbeck's novel of American itinerant agricultural workers in the depression, there are similarities like the rapidly-growing Tent City in Los Angeles, filling up with residents from foreclosed housing. Such foreclosures are now at an all-time national high, the ramifications of which will damage far more than financial institutions and the building related industries.

This column sees no reason to change its view of lightening up on equities for safe haven investments expressed in our last issue.

Still continuing last month's pattern, our own list of stocks saw falls outnumber rises by 17 to 12, with much of the change evident in the logistics services sector. the French 3PL provider, Geodis, led the way down with a 19.2% fall, closely followed by Business Post, off 16.5% and Wincanton, 10.4%. One exception, howeAt the time of the results release, the chief executive, Paul Heiden, sounded a bullish note, saying that the full year remained strong, with closing order books up 23.4% on March 31, 2007. In particular, he stressed that the Logistex division, responsible for systems handling, although displaying lower turnover on last year's levels owing to rescheduling of major orders, showed that order intake was robust and 19% higher than the first half of 2006. Since the results announcement, however, FKI has warned of order delays, saying US customers have decided to delay orders for warehouse and distribution projects owing to uncertainty in their end markets. The cumulative effect of this could see Logistex's sales fall 10-15% compared with the last year's second half.

This is a significant blow to the group's strategy of selling off its Logistex and hardware divisions, so necessary to reduce disturbingly high net debt and leave the group free to concentr DAHER acquires precision engineers and fabricators ICN

DAHER UK, part of the European integrated equipment and services suppliers DAHER CIE, has acquired LCN Ltd, precision engineers and fabricators.

Under the terms of the acquisition DAHER has purchased 100% of the company from its present owners. The acquisition will secure the jobs of the 30 people who work at the company.

"This acquisition enhances one of our core skills in the UK, the design and manufacture of special-to-type plastic and wood containers for the aerospace and defence sectors. LCN's experience in metallic containers and fittings will enable us together to provide a comprehensive range of logistic equipment," said Chris Melrose, Chairman of DAHER in the UK.

rs ahead. Whilst traditional road hauliers have struggled with falling revenues and margins, the pallet networks have seen its volumes grow significantly. The industry is now attracting increasing interest from a range of express, parcels and logistics companies hoping to benefit from its success. With only a small market penetration the market looks set to continue its strong growth for many years to come.

In terms of volumes, Transport Intelligence estimates that the UK Pallet Network market will grow at around 25% in 2008 but will start to slow slightly between 2009 and 2011. Overall it is estimated that the market will grow by a CAGR of 22% between 2007 and 2011.

According to Joel Ray, the report's author, one of the key reasons behind the growth in pallet networks has been a switch from FTL (full-trailer-loads) consignments to smaller, more frequent deliveries. This has come about due to the prevalence of just-in-time manufacturing which has placed an emphasis on the frequent replenishment of stocks in order to reduce inventory. This basic supply chain concept has required the supply side logistics industry to adopt more flexible, time sensitive business models, and it has also resulted in smaller consignments which can be more easily unitised using pallets.

The number of 'brands' in the pallet market also suggests that there will be a certain amount of consolidation in the years ahead. Economies of scale at hubs indicate that the smaller players will struggle to compete with larger rivals unless they develop their own competitive advantage.

UK Pallet Networks 2008 is an ideal starting point for companies which are interested in becoming involved in the market, or who want to find out more about the competition and market in which they operate.